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«Bob Lissingtona and Claire Matthewsb* School of Economics and Finance Massey University Private Bag 11-222, Palmerston North, New Zealand 4442 a ...»

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Intergenerational transfer of financial literacy

Bob Lissingtona


Claire Matthewsb*

School of Economics and Finance

Massey University

Private Bag 11-222, Palmerston North, New Zealand 4442




Ph +64 6 3569099 Extn 2329


* Corresponding author

This Version: October 2012


Financial literacy levels are the focus of increasing concern around the world. One way in

which financial literacy is gained is via intergenerational transfer from one’s parents and grandparents, but it is unknown to what extent this is occurring. This paper reports the results of a series of interviews with high net worth individual. We find that the intergenerational transfer of financial literacy is less formal than might be expected in high net worth families, and tends to be via observation and experience rather than formal passing on of knowledge.

We also find that despite concerns about the ability of their intended heirs to manage their expected inheritance, only a small proportion take some form of action to deal with those concerns.

Keywords: Financial literacy, Inter-generational; New Zealand JEL Codes: D14 1 Background and Overview

Financial literacy has been defined in a variety of ways, and involves several characteristics:

knowledge, ability or skills, behavior, and experiences. There is little evidence that a real underlying demand for financial knowledge and financial literacy presently exists globally.

This demonstrates a general lack of understanding and appreciation by individuals, businesses and governments of the value and potential positive impact that a lift in financial literacy could provide for individuals, their families, and their communities, as well as to the national well-being.

A massive shift in wealth is expected in the near future as the baby-boomers start to transfer their wealth to the next generation. Accompanying this transfer are concerns surrounding the ability of the younger generations to handle this newly acquired wealth. Therefore, it is important that alongside this transfer of wealth, there is also an effective transfer of financial literacy. Schervish & Lines (2006) estimate that over US$41 trillion will change hands between generations in the period between 2001 and 2055 in the United States alone. With this large expected transfer of wealth, comes a change in parental attitudes brought about by conflicting concerns. The traditional desire to leave an inheritance that provides financial support has to be balanced against the fear that wealth will sap satisfaction, deplete motivation and diminish personal happiness. (Merrill Lynch and Capgemini 2008).

Wealthy parents believe they can resolve these issues by encouraging their children in open discussions regarding family values, promoting their financial literacy, fostering open dialogue around sensitive issues, and boosting candour between generations regarding what is or is not a reasonable and equitable expectation from the impending transfer. (Schervish & Danko 2006; Merrill Lynch & Capgemini, 2008). However, it would appear that some families are better at passing on financial literacy between generations than others. Merrill Lynch Capgemini (2008) gave the example that self-made multi-millionaire, Cornelius Vanderbilt, the richest man in the USA died in 1877 leaving US$100 million. His son, William, doubled this before his death in 1885. At a family reunion less than a century later, there was not one millionaire amongst the 120 direct descendants.

2 Financial literacy is a catalyst for the successful accumulation of personal and intergenerational wealth. Without financial literacy, generations are destined to repeat expensive, yet avoidable financial mistakes that occur through ignorance, continuation of poor financial habits and the traditional trial-and-error approach to gaining financial wisdom.

Stanley & Danko (1996) found children of affluent parents did not automatically perform as well as their parents in terms of accumulating wealth. Parents who consciously or unconsciously encouraged financial dependency by heavily subsiding their children’s standards of living tended to produce “Under Accumulators of Wealth” (UAW). These UAW children grew up in households with high consumption, few economic constraints, little planning or budgeting, and no discipline. By contrast “Prodigious Accumulators of Wealth” (PAW) came from households where their parents were frugal, well disciplined, independent and instilled similar values in their children.

Financial literacy appears to be largely shaped by culture, values, beliefs and habits, many of which have been passed down, consciously and unconsciously, through generations. It is also influenced by an individual’s parents, family, friends, teachers, employers, and community.

Some families appear better at passing on financial literacy between generations than others.

Current low levels of financial literacy infer that either financial literacy transfer is not occurring or that the current methods of transfer are infrequent and ineffectual. The better we understand these factors and behavioural influences are understood, the better to the opportunities to advance society through economic growth.

While there is an important need for the pending transfer of wealth through inheritance to be accompanied by an effective transfer of financial literacy, there has been little research to understand exactly what financial knowledge, habits, attitudes and values have passed between generations, when this occurs, or why it does or does not occur. This paper addresses some of these issues and seeks to gain a better understanding of the impact of past experiences, culture, values, attitudes and beliefs on the inter-generational transfer of financial literacy for individuals with a high net worth in New Zealand.

3Prior Research

There is no consistent or widely held definition for financial literacy, although there do appear to be some repeated conceptual themes and characteristics common to most definitions (Schagen & Lines, 1996; Hilgert, Hogarth & Beverly, 2003; FINRA, 2003; Moore, 2003;

National Council of Economic Education (NCEE), 2005; Mandell, 2007; Lusardi and Mitchell, 2007; Lusardi & Tufano, 2008; Lusardi, 2008; Hung, Parker & Yoong, 2009). Since no single definition was found that incorporates all the key elements required a working

definition has been developed for use with this study:

Financial literacy is the ability to use basic economic and financial concepts to reinforce positive financial behaviour, and make informed decisions regarding the effective use and management of money and resources for a lifetime of financial well-being.

Financial literacy should be considered a basic survival skill that is as important as “teaching kids to look both ways before crossing the street" (McCormick & Godsted (2006) cited Pulley, p10). Therefore, the reasons for financial literacy levels need to be explored and then to be addressed. Is financial literacy transfer occurring but ineffectively, or are the number of opportunities to gain financial knowledge and skills limited, or are the opportunities to implement limited? McCormick & Godsted (2006) believe any financial literacy learning experience or education received is better than none at all.

There are many examples related to when people learn financial literacy, but the question of whether financial literacy is best learnt when young or as an adult has not been definitively answered. The literature would tend to support an andragogical learning approach as being more effective than a pedagogical approach. Indeed, Ramsden (1996) suggests adults facing real life situations are better motivated to learn and apply financial knowledge and skills than school children. This is also considered by Marton, Housell & Entwistle (1997) and Prosser & Trigwell (1999). While children are often seen as being more receptive, Prosser and Trigwell (1999) believe there is a danger they will fail to see the relevance or importance of gaining financial literacy at an early age, especially if they don’t have the opportunity to start to use this newly acquired knowledge and skills (see also Cooke & Abernethy 1999).

4 Some researchers suggest that it is better to introduce sound economic and financial principles at an early age, so good habits and practices can be developed to empower consumers to gain experiences they can draw on throughout life. Starting at an early age and continued regularly, this provides individuals with the best chance of accumulating wealth, thanks to the power of compounding interest. If this was to happen, the results would be profound not just for the individuals, but for their communities and the nation’s economic and financial systems (Malin 2006; McCormick & Godsted 2006; Tschache 2009).

McCormick & Godsted (2006) believed there are several financial skills children should be encouraged to develop early that would serve them well throughout their life time. These

skills are:

“Goal Setting - beginning to develop the ability to plan for future purchases and to • take the steps necessary to achieve those goals.

Inter-temporal choice - presenting scenarios to children so that they understand that • there are times when it is better to wait for something instead of acquiring it immediately.

Earning - giving children the opportunity to earn, rather than always receiving gifts, • helps them to see the value in the time and effort they would expend towards purchasing an object.

Saving - developing habits in children where it becomes second nature to put a portion • of their earnings away, and promoting activities where the act of savings becomes a form of instant gratification.

Spending - learning how to be savvier in the way children make choices as consumers, • comparing costs and considering marketing claims.

Giving - helping children to see that philanthropy can be a natural part of being • financially literate, thereby setting the stage for a nation of givers in the future” (p.11).

These skills may be transferred from older generations and may be part of the transfer of financial literacy between generations. Intergenerational transfer of financial literacy is usually the transfer of knowledge, skills, habits, beliefs, values and attitudes from parents to their children. However, the transfer of financial literacy could equally be carried out by 5 grandparents, neighbours, friends or work colleagues. In any case, it will usually happen on a one-to-one basis.

Counter to the traditional view of intergenerational transfer of financial literacy from parents to children, it is now possible for financial knowledge to transfer from younger generations to older generations, i.e. from children to their parents, thanks largely to the early adoption of computers and internet skills by the younger generation.

Sher (2002) said that his father gave him some great advice, “never get advice from anyone more messed up than you are” (p.158) to which he reflected that too many people seek advice from a friend, family member or work colleague because it was free, rather than pay a professional for proper advice. One problem is that people usually lack the ability to recognise if someone they seek advice from has any real financial knowledge, skills and experience, or possesses a higher level of financial literacy than they do.

Financial literacy transfer can also happen as a result of a formal educational process through schools, tertiary institutions or government agencies. It may also happen informally through employers, community and government agencies, banks, insurance and investment companies, as well as through social media such as television or internet.

Employers can provide financial information but they typically don’t see it as their role, and they tend to avoid becoming involved, beyond providing any information required of them, as they do not want to be seen as “offering advice” for which they could later be criticised or have liability attached (Willis, 2008). Banks, insurance and investment companies provide financial information, product statements and required disclosure, but see little immediate financial return in providing financial education in any formal or structured way (Marcolin & Abraham 2006).

Some financial service advisers may try to educate their clients in a limited way in order to win or retain clients, but they often lack the time, inclination and/or skills to provide quality, structured learning (Bettman, Luce & Payne 1998). However, Marcolin & Abraham (2006) argue that financial advisers have a real opportunity to step in to educate clients (and their children and grandchildren) as part of a comprehensive package of services they could provide.

6 Malin (2006) believes that central banks should play a role in lifting their nation’s financial literacy, as they come from an impartial position, and are motivated by public good rather than politics or profits. However, central banks will need to develop a long-term vision and will require a clear mandate and operational budget to do so.

Traditionally financial literacy was considered similar to other skills, like a trade, passed down from one generation to the next, by parents wanting to educate their own children.

Kiyosaki (1997) believes the subject of money is better taught at home, rather than in schools that traditionally focus on scholastic and professional skills, rather than on financial skills. It is the passing on of positive or negative habits, sayings, attitudes and values, that Kiyosaki feels strongly influences generations financially, by positively reinforcing or limiting their thinking and belief in themselves.

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